Contango Report: Precious Metals Sloping Up for 2014

As we kick off the New Year, commodity investors are hoping that 2014 brings more favorable returns than its predecessor. Last year was largely marked by dwindling commodity returns with a number of hard assets wreaking havoc on investors and traders across the board. Gearing up for 2014, we take a look at some of the biggest commodities currently contangoed to help you get prepared for the new year [for more commodity news and analysis subscribe to our free newsletter].

Contango is the process whereby near month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. This is often caused by storage costs associated with each individual commodity, but it can also be partly attributed to market expectations of which way that particular asset will move in the future.

For traders utilizing single contracts, contango may not be of major concern, but for those utilizing futures-based ETFs it is something to take into account. Each month, a futures-based ETF will need to roll out of its current contract and into another future contract (the time span will vary depending on a fund’s strategy). In a contangoed environment, that may force the ETF to sell out of one contract and pay more for another, effectively eating away at a position over time. This means that contango is especially important to ETF investors [see also Understanding Contango Through Natural Gas Futures].

Below, we outline some of the most contagoed commodities moving into 2014:

Corn: Sneaking in with the precious metals group is corn, as the commodity sees its futures contracts sitting in contango through July of 2015. It’s not surprising to see an expectation of rising prices for corn as it was one of the worst performing commodities last year.

Gold: After suffering a sharp correction in 2013, gold futures are sitting in contango through the June 2019 contract – as far out as the futures are currently offered.

Palladium: Palladium was the only precious metal that had a positive 2013 (but just barely). The white metal is currently showing contango through the December 2014 contract.

Platinum: Currently the most expensive of the precious metals, platinum futures are contangoed through the last offered contract in January of 2015.

Silver: Though gold had a poor showing last year, silver was the worst performing commodity. That combined with storage costs bring a contangoed environment stretching all the way to July of 2018.

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